Deterring and Detecting
Government Procurement Fraud
Breakout Session #107
Name: Michael A. Smigocki, CPA/ABV, CVA
Sr. Managing Director
Federal Strategies Group, LLC
July 19, 2010
11:15am – 12:30pm
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Federal Strategies Group, LLC
• Management Consultants and
Forensic Accounting Specialists to
the Government Contracting Industry.
• 4 Principal Areas of Service
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Management/Regulatory Consulting
including business valuations
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Outsourced/Co-sourced accounting, CFO,
contracts and internal audit services
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Forensic accounting and Expert Testimony
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Training programs
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To Be Covered
• Fraud Overview
• Fraud and Government Contracting
• Red Flags
• Deterrence and Detection Strategies
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“There is no kind of dishonesty into which
otherwise good people more easily and more
frequently fall than that of defrauding the
government.”
Benjamin Franklin
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What is Fraud?
Common definitions
• Intentional use of deception
• Unlawful gain.
• To deprive or injure another.
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What is Fraud?
Individual vs. Organizational Fraud
• Individual defrauds the Company for
individual gain.
• Company defrauds the Government for
Organizational gain.
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What is Fraud?
Characteristics of Individual
Fraudsters
• Job dissatisfaction (#1 cause!)
• Failure to achieve social and/or financial
success.
• Mid-life crisis.
• Addictions (gambling, drugs, alcohol).
• Marital problems and divorce.
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What is Fraud?
Characteristics of Organizational
Fraudsters
• Culture of aggression.
• Lack of emphasis on internal controls.
• Lack of concern for laws, regulations.
• High turnover of personnel.
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Fraud & Government
Contracting
Federal Statutes Related to Fraud
• False Claims Act (18 U.S.C. § 287)
• Procurement Integrity Act (41 U.S.C. § 423)
• Sarbanes Oxley Act of 2002
• Mandatory Disclosure Rule (FAR subparts
3.1004 and 52.203-13)
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Fraud & Government
Contracting
Most Common Procurement Fraud
Schemes
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Bribes & Kickbacks
Change Order Abuse
Collusive bidding
Excluding qualified bidders
Failure to meet contract specs
False, inflated or duplicative invoices
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Fraud & Government
Contracting
Most Common Procurement Fraud
Schemes
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Phantom vendors
Product substitution
Purchases for personal use
Co-mingling of contracts
Conflicts of interest
Cost mischarging
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Fraud & Government
Contracting
Most Common Procurement Fraud
Schemes
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Defective pricing
Split purchases
False statements and claims
Imprest fund abuse
Leaking of bid information
Manipulation of bids
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Fraud & Government
Contracting
Most Common Procurement Fraud
Schemes
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Rigged specifications
Unbalanced bidding
Unjustified sole source
Unnecessary purchases
Revenue recognition
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Fraud & Government
Contracting
Most Common Detection Methods for
Government Procurement Fraud
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Hotline tip
Management review
Internal audit
Account reconciliation
External audit
Other
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47%
12%
15%
5%
7%
14%
Red Flags in Detection of
Procurement Fraud
Bribes, Kickbacks & Conflicts of
Interest
• Contractor receiving favorable treatment
over extended period of time.
• Unexplained increase in wealth by
procurement officials.
• Close association/inappropriate gifting.
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Red Flags in Detection of
Procurement Fraud
Bribes, Kickbacks & Conflicts of
Interest (con’t)
• Unjustified high prices/large price
increases.
• High volume of purchases.
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Red Flags in Detection of
Procurement Fraud
Defective Pricing
• Contractor unable to provide adequate
documentation upon request.
• Incomplete documentation for cost
proposals.
• Use of out-of-date pricing information.
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Red Flags in Detection of
Procurement Fraud
Defective Pricing (con’t)
• Unrealistically high profit margins during
contract performance.
• Subcontractor prices that differ from
proposed prices.
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Red Flags in Detection of
Procurement Fraud
Cost Mischarging (particularly with
labor contracts)
• Discrepancies or errors in labor costs.
• Discrepancies or errors in material costs.
• Questionable cost transfers.
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Red Flags in Detection of
Procurement Fraud
False, Inflated or Duplicative
Invoicing
• Discrepancies or errors in invoices and
contractor data.
• Duplicative documents presented for
payment.
• Multiple payments in the same or similar
amounts.
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Red Flags in Detection of
Procurement Fraud
Revenue Recognition
• Recording revenue prior to performing
services.
• Failure to use percentage of completion on
fixed price contracts.
• Recording revenue using target rates, not
actual rates.
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Red Flags in Detection of
Procurement Fraud
Revenue Recognition (con’t)
• Failure to record forward losses on
contracts.
• Failure to segregate direct costs by
contract.
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Deterrence Strategies
Understanding Procurement Fraud
• Easier to deter fraud than to detect it.
• Fear of detection is the most significant
deterrent.
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Deterrence Strategies
Deterrence of Fraud – Contractor’s
Perspective
• Establish a Culture of Ethics and Integrity
(“Tone at the Top”)
• Accountability.
• Institute a Code of Business Ethics and
Conduct.
• Employee training on Ethics and Conduct.
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Deterrence Strategies
Deterrence of Fraud – Contractor’s
Perspective (con’t)
• Employee training on ethics and conduct.
• Provide a confidential reporting
mechanism.
• Establish an effective internal audit.
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Deterrence Strategies
Deterrence of Fraud – Government’s
Perspective
• Perform a Threat Analysis against the
previously mentioned schemes.
• Assess likelihood of schemes occurring in
your organization.
• Develop testing programs to ensure
compliance.
• Conduct on-going training to enhance fraud
awareness.
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Questions?
Michael A. Smigocki, CPA/ABV, CVA
Senior Managing Director
Federal Strategies Group, LLC.
15850 Crabbs Branch Way, Suite 310
Rockville, MD 20855
(301) 770-5850 Ext. 400
MikeS@Fedstrat.com
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